Fracking

In the world of investing, it seems that even the Church of England believes in a good rate of return. That became blatantly obvious when it was revealed in the UK press recently that the Church had ties with Wonga, the high interest online payday lender, which it later severed. Not being able to let a good investment go to waste, this hardnosed investor is now dabbling in the no less controversial Industry of British Fracking.

But put the controversy aside for a minute and let’s ponder over the likelihood of Fracking being Britain’s next big energy revolution. Many historians would argue that centuries ago, when the world moved from wood to coal as a form of energy, it was Britain’s largest coal reserves that powered the country to lead the way during the Industrial revolution. Moreover, look how the discovery of vast reserves of a more energy dense fossil fuel, oil, have transformed the Middle East. This is particularly apparent in the UAE where they’ve turned desert into ultra-modern cities of the 21 century in just four decades. It’s transformed the local populations from Bedouins (a more or less nomadic people) to now boasting one of the highest GDP per capita in the world.

Now the energy has another development in fossil fuel extraction: Fracking.

Fracking might be a solution to the demographic time bomb looming in developed economies, with ballooning dependant elderly populations and shrinking taxpaying workforce base. In the US state of Pennsylvania, who have taken on fracking in a big way, the senator running for re-election is proposing to tax fracking. The revenue would go solely towards the state’s public pension debt. For the outsider or the retail investor, like any grand investment opportunity in its infancy, getting in at the early stage (a more risky entry point) could pull off enormous profits if fracking becomes an accepted main energy source. Paradoxically, the current deteriorating geopolitical situation with Russia and Europe is probably going to give the British fracking industry a big boost. Russia, the largest supplier of gas in Europe is starting to look wobbly as a reliable supplier in light of the cooling relations over the Ukrainian crisis.

The world’s biggest shale basin is not in China or the USA but in Britain. That’s according to 2013’s survey by the British Geological Survey (BGS) report, which estimates there may be as much as 1,300 trillion cubic feet (tcf) of shale gas trapped in the Bowland shale basin alone. In fact, the BGS’s upper estimate is almost twice that figure, 2,281 tcf. To give us a prospective on this, Britain has almost double the amount of shale gas than in China, which has 1,275tc the USA 862 tcf, Brazil 226 tcf and France 180 tcf. So by a sizable figure Britain’s shale gas reserves lead the world, according to the British Geological Survey. “10% of Bowland Shale would equal 130 trillion cubic feet – or about 50 years of total UK consumption.”

Such vast reserves cannot be ignored from a national security standpoint for obtaining energy security independence, particularly at a time when energy supplies from Russia now look less reliable. Moreover, fracking cannot be overlooked from an economic standpoint either in a climate of rising budget deficits and falling exports. To put some flesh on the bonds, in economic terms, if just a fraction of those gas resources are realized at today’s prices, they would be worth more than one trillion pounds, or worth £16,000 to each person in Britain, according to the report. It is an undisputable fact that Norway’s oil revenue has propelled its people to enjoy the world’s highest living standards.

British fracking has won the backing of the country’s most powerful institutions, the Church and parliament. It’s a moon eclipse event when you get the country’s main political parties sharing the same view on an issue; they are all backing fracking. Indeed, the last Queen’s Speech back in June was used to path the way for changes to the laws of trespass that require land- and homeowners to give permission for shale gas and oil drilling under their land. This means that it would allow drilling to take place 300 meters vertically and extend up to 3km (1.86 miles) horizontally underground from a central well pad. As a sweetener local communities would also receive up to 20,000 pounds for each horizontal well drilled.

But here is the cold shower bit about fracking. Hydraulic fracking, the process of drilling and injecting fluid into the ground at a high pressure in order to fracture shale rocks to release natural gas, creates earth tremors and could even contaminate drinking water. During the process methane gas and toxic chemicals leach from the system and contaminate the water table. There have been 1,000 documented cases of water contamination next to areas of gas drilling. Ingesting the contaminate water can cause sensory, respiratory and neurological damage. Approximately, 40,000 gallons of chemicals are used per fracturing. The industry argues that when fracking is properly regulated the environmental effects are minimal. So investors need to weigh up the environmental issue and what impact this could have in the development of the industry. Moreover, increasing the gas supply means lower prices and profits. This could rattle big energy suppliers with money muscle power to lobby government to halt fracking.

Nevertheless, for those who think fracking is going to be a big part of Britain then there are several ways to invest in it. At the riskier end are the aim-listed shale-gas companies. Another option could be on junior markets. Egdon Resources is a UK oil and gas minnow, but its intentions for growth are clear. A safer play could be through Centrica, British gas owner, who has a Bowland license. Companies providing engineering expertise might also be a good play.